Short-selling Bans Failed to Prevent US Stocks Declines: NY Fed

NEW YORK, Aug 10 (Reuters) - Bans on short-selling imposed
during the financial crisis in the belief that short sales were
driving U.S. stock prices below fundamental values did little to
stabilize those prices, according to a study by New York Fed
economists.

U.S. regulators banned the short-selling of financial stocks
during the 2008-09 crisis and have selectively applied
restrictions on short sales at other times.

The study looked at the bans' effectiveness in limiting
price declines in 2008. It also looked at the effect of
short-selling in August 2011, when debt-rating agency Standard &
Poor's lowered the U.S. sovereign long-term credit rating. The
move prompted the S&P 500 to fall 6.66 percent on the next
trading day, when there was no short-selling ban in place.

Results showed short-selling restrictions did little to slow
declines in financial stocks when they were in effect in 2008.
Share prices fell more than 12 percent over the 14 days in which
the ban was in effect. The ban also increased trading costs in
the equity and options markets by more than $1 billion.

The Fed economists also said there is no evidence that stock
prices declined following the downgrade of the U.S. credit
rating as a result of short-selling.

"A statistical exercise conducted to determine the
relationship between short-selling and stock returns finds that
the two variables are minimally correlated," the study said.

Short-selling entails borrowing shares and then selling them
in the expectation they can be repurchased later at a lower
price. Although the practice is common, there are concerns that
short-selling drives stock prices to artificially low levels.
(Reporting by Angela Moon; Editing by Dan Grebler)